10/05/2018

Retirees Living Abroad May Face IRS Penalties

Retirees who would like to live abroad in European countries or other nations, should carefully consider the law enacted by Congress to enforce financial compliance by Americans with assets abroad, according to CNBC in “How to retire overseas and avoid IRS penalties.” The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010.

FATCA works through what is called “dual reporting.” Other countries agree to report on assets owned by American account holders. Those living outside of the U.S. must report honestly what they have in those foreign bank accounts every year, when they file their income taxes.

For people who are not big-time tax evaders hiding large amounts of money offshore and make an honest mistake, it can become a nightmare.

One client forgot to tell his accountant about an account with $3,500 that he owned in a foreign bank. The penalties were stiff. An attorney who was experienced in tax situations faced by people living outside of the U.S. had to be retained.

Here’s the thing: most automated tax preparation programs default to answering “No” on Schedule B, where the person filling out the form is asked if they have a bank account in a foreign country.

Who has to file? All Americans living overseas are required to file a tax return. It doesn’t matter if you pay foreign taxes, or even if the U.S. has a tax treaty with the country.

In addition to a 1040 form, you must file additional forms for the foreign earned income exclusion or the foreign tax credit form.

The only exception might be if you receive Social Security benefits and have no other income sources. That is a “might,” though—check with your CPA!

Some people choose to retire outside of the U.S., in the hope of keeping healthcare costs manageable. However, any gains from having lower healthcare costs would evaporate quickly in the face of tax penalties from the IRS.

Be certain to work with a CPA who has experience in overseas tax requirements and FBAR rules (Report of Foreign Bank and Financial Accounts).